Are Sirius' Ambitions Premature?

By Brian GormanJanuary 6, 2005

It seems lately that Sirius Satellite Radio (Nasdaq: SIRI) can do no wrong.

On Tuesday, Ford(NYSE: F) announced that it will offer factory installation of the company's radios beginning this summer. The automaker expects to include the option in up to 21 vehicle lines, a move that could add as many as 1 million Sirius subscribers over the next two years. The announcement added weight to Sirius' projection of doubling its subscriber base in 2005.

Then, on Wednesday, Sirius disclosed that it will team up with Microsoft (Nasdaq: MSFT) to provide a video option with its satellite radio service. Starting in the second half of 2006, Sirius plans to offer two or three video channels for children. With children's programming being added to a service that also features Howard Stern, Sirius certainly will have all of its bases covered. And landing the software giant as a partner suggests that the big boys are taking Sirius' technology seriously.

Despite all the positive news flow, however, investors might not want to get too carried away. While Sirius' jump from 261,061 subscribers to more than 1.1 million this past year is impressive, the company's rival, XM Satellite Radio(Nasdaq: XMSR), closed out 2004 with 3.2 million subscribers. Assuming both companies meet their projections for 2005, Sirius will have 2.2 million subscribers, compared with XM's 5.5 million. Yet at the same time, Sirius' market capitalization now exceeds XM's by nearly $2.6 billion.

Still, satellite radio's long-term growth will rest on the attractiveness of its content, and in this area, Sirius appears to be in good shape. Stern, although by no means universally loved, has an incredibly loyal following, and he has also shown a knack for discovering and developing talent, some of which has gone mainstream. Stern show regular John Melendez, to cite one example, has been hired away as the announcer for The Tonight Show. In turn, Sirius CEO Mel Karmazin has demonstrated a capacity for building business and managing talent.

At the moment, Sirius' stock certainly looks to be ahead of itself, but the firm could still grow into its current market capitalization. Buying the stock now would be a mistake, but selling it might be an even graver error.

Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.